Why passive activity rules matter
Rental losses are normally passive — they can only offset other passive income, not W-2 wages or business profits. A large cost-segregation loss on a rental may therefore be suspended by passive activity rules, providing no current tax benefit.
What real estate professional status does
Qualifying as a real estate professional (REPS) converts your rental activities from passive to non-passive. The requirements: you must spend more than 750 hours per year in real property trades or businesses in which you materially participate, and those hours must exceed more than half of all your working hours for the year. One spouse meeting the test in a joint filing is sufficient.
Combining REPS with cost segregation
Once REPS is established, a cost segregation study can generate a large paper loss — via bonus-accelerated depreciation — that flows as a non-passive loss offsetting active income including W-2 wages. Investors in high brackets have used this to generate six-figure deductions. The IRS scrutinizes REPS claims heavily, so meticulous records of hours are essential.
Frequently asked questions
What are the REPS hour requirements?
750+ hours in real property trades or businesses in which you materially participate, AND those hours must exceed more than half of your total working hours for the year.
Does my spouse's REPS status apply to our joint return?
Yes — if one spouse qualifies, the REPS status applies to both spouses' rental activities on a joint return.
Sources
- IRS Publication 946 — How to Depreciate Property
- IRS — Cost Segregation Audit Techniques Guide
- IRS Publication 527 — Residential Rental Property
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.